When Performance Matters

Cost Of Bad Customer Service Skills

Measuring The Financial Cost Of Bad Customer Service Skills

Poor customer service skills can literally cost your business a fortune. This article makes the case for service improvement by accurately measuring the potential Return On Investment.

A recent study found that nine out of 10 consumers surveyed, declared that great customer service skills are "very or extremely" important in deciding whether to give a service provider repeat business. Additionally, 32% of respondents indicated they change providers because of bad service.

Despite the importance of satisfying the customer, it does not appear that companies are properly gathering vital consumer feedback, with just 25% of surveyed consumers reported having frequent opportunities to voice their opinions on their service experiences. About 30% reported they had infrequent opportunities to do so.

According to the findings, the average consumer switched businesses they dealt with twice in the past three years due to "bad service".

The top characteristics of companies with "great service" were:

Resolving questions and problems (66%)

Knowledge of the product or service (49%)

Being easy to reach (35%)

Understanding requirements (35%)

The top characteristics associated with "bad service" were:

Inability to resolve questions or problems (46%)

Being unavailable/difficult to reach (38%)

Needing to deal with multiple people/departments to resolve problems (37%)

Lack of product knowledge (34%), and

Unprofessional demeanour (33%)

Another study, entitled "The Customer Experience Report, Great Britain 2006", reveals that 65 per cent of all respondents moved their business elsewhere after a bad service experience, while more than one quarter - 27 per cent - of those surveyed also indicate that once their custom is lost, it is lost forever.

On the other hand, positive customer experiences have a major impact on consumers' brand perceptions and buying behaviour, with 78 per cent of participants saying that they would be most likely to 'greatly or somewhat' increase their custom on the basis of consistently excellent service.

Clearly there are costs associated with money wasted on customer acquisition when customers, after experiencing the service offered, defect. Revenue and profit decrease because of poor customer retention. This is especially true as research confirms that long-term customers are more profitable to serve.

Winning back lost custom and reputation is extremely costly as well, with more than half of respondents saying they would require evidence that the organisation's customer service had improved, and 48 per cent stating that the organisation would have to prove that it valued their custom.

The negative effects of bad word-of-mouth and associated reputation risk should not be underestimated. There are plenty of examples where a simple apology combined with a sincere effort to solve a customer's problem could have saved hundreds if not thousands of dollars in wasted time, reputation damage and lost revenue.

In today's online world a "reputation risk" problem is potentially very damaging. Once something has been written about you in the press and online, it's very difficult to get it removed. This means that any prospective customer who decides to do a search on your business name could come across it.

The service/cost dilemma

It is undisputed that customers leave if the customer experience isn't up-to-scratch; we also know that businesses want to control or reduce operating costs. You may feel your organisation is in a "catch-22" situation: it either spends money to improve the customer experience or cuts costs and risks losing customers.

That's the service/cost dilemma - where costs increase in ratio with efforts to boost customer experience, while slashing costs often means slashing service. This mindset is not always correct, as the cost of delivering poor service may not be properly accounted for and allocated.

A clear correlation between customer service skills improvement efforts and savings and profitability has been established in many public and private sector organisations. A breakthrough is needed in our management thinking to resolve this service/cost dilemma by better understanding the actual cost of bad service and the effect it has on cost, revenue, reputation and customer experience across all key interactions.

It is necessary to measure the financial cost of bad service and the tangible and intangible savings and benefits of reaching customer service excellence. The following diagram outlines the direct and indirect benefits of a customer service improvement program and how the model works to improve profitability through reduced costs.

Over the long term companies achieving customer service skills excellence are reporting significant revenue increases and cost savings in the order of 15 per cent to 20 per cent whilst at the same time measuring increased customer satisfaction.

Visible and invisible cost associated with bad service

There are two types of costs that can be attributed to ‘bad service':

Visible - These are costs you probably know about or have existing systems to capture.

Invisible - The invisible costs can be more difficult to accurately understand, but it is worth the effort to set up systems to capture them.

Take a look at the multiple contacts and hand-offs to deal with a single issue or complaint wasting staff time, the hidden activities carried out to deal with poor service problems, lost sales due to lack of confidence in a company's service standards and ability to meet requirements, lost revenue based the ‘lifetime value of the customer' when customers are lost because of service issues.

Try to work out the estimated cost of visible and invisible bad service to your organisation as a percentage of revenue. You may be horrified by the numbers!

It is the realisation that bad service is bad financially that makes the Return On Investment business case and provides justification to spend the time, effort and financial resources to improve your service levels. Once you have established the right metrics you can clearly see the benefits, financial and otherwise, of a service improvement program and evaluate the cost of implementing a formal customer service management system.

It's easy to justify service improvements once you have identified the ‘size of the prize' in terms of savings and revenue increases. Of course, from these savings the total cost of the customer service management system (implementation, training, measurement of financials, additional headcount to manage the system, annual maintenance, etc.) need to be subtracted to obtain the Average Return On Investment per annum, remembering that savings made will be ongoing and usually increased over time as the customer service management system becomes more effective and improvements continue.

Seek to understand the financial cost of bad service in your organisation. I assure you by applying financial knowledge, business savvy, change management and common sense, you will know with certainty that your business' customer service skills improvement program is worth the cost.

In fact, if you implement a customer service skills management system right, I believe it will accomplish beyond what was targeted, both on a customer satisfaction level and financially.

Brett Whitford is the founder and Executive Director of the Customer Service Institute of Australia which is dedicated to the professional development of organisations and individuals in customer service through education, certification and recognition. He is the author of five bestselling business books, including 'Customer Service Excellence'. For further information Phone: +61 2 9386 4477; Email:
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or visit the Web site: www.csia.com.au